On 3 December 2012, the German Federal Ministry of Finance (BMF) published a draft bill for a Fund Location Act ("FoG") was published. The draft law is intended to make Germany more attractive as a fund location in an international comparison and contains some important changes, which we summarise briefly below:

  • VAT exemption for the management fee for private equity funds: The VAT liability of the ongoing management fee for alternative investment funds (private equity, venture capital, etc.) set up in Germany has been one of the most significant and controversial issues for years. frequently criticised disadvantages for Germany as a fund location. Funds were often set up in Luxembourg or the UK for this reason alone. Unfortunately, the German legislator has not recognised the actual VAT exemption under European law the management fee § 4 No. 8 Bs. h UStG only with regard to the management of securities funds (so-called UCITS) that conform to the guidelines and comparable Alternative Investment Funds (AIFs). In practice, this means that typical private equity funds in Germany do not benefit from the tax-free management fee under the current legal situation.

Fortunately, the legislator now wants to change this by explicitly including the management of "venture capital funds" in the VAT exemption. The draft bill does not contain a definition of privileged venture capital funds. Nevertheless, it can be assumed, also in light of the legislative intention, that typical closed-end private equity and venture capital funds qualify as such venture capital funds.

  • Taxation of employee shareholdings

Particularly in the start-up sector, many employees are willing to work for a comparatively low salary in return for a share in the company's performance. If an employee receives discounted shares in their employer's company, this represents a taxable non-cash benefit for the employee in the amount of the difference to the market value of the shares. In practice, this taxation without an inflow of liquidity is a major obstacle to the widespread implementation of employee share ownership schemes.

The legislator plans to mitigate this in two ways: Firstly, the existing tax-free allowance pursuant to Section 3 No. 39 EStG is to be doubled from EUR 360 to EUR 720. More relevant in practice, however, is the possibility for small and medium-sized enterprises (SMEs) to defer taxation of the pecuniary benefit (for a maximum of 10 years) until the time of the sale of the shareholding (e.g. as part of an IPO). This prevents the premature taxation of often only vague hidden reserves without an inflow of liquidity ("dry-income tax"). The tax payment is due when it is actually realised and the employee also has the corresponding liquidity to pay the tax.

  • Product range for investment funds and simplified management

The product range for closed-ended AIFs is to be expanded in future. The intention is to also launch these as infrastructure special funds and master/feeder funds. The current restriction to the legal form of a limited partnership or public limited company for certain real asset investments would therefore no longer apply and new vehicles would be available to investors.

The draft also contains amendments that simplify the design, management and accounting of open-ended and closed-ended funds. Despite this sign of reducing bureaucracy, the draft also provides for a further development of information obligations. For example, European requirements on information obligations relating to environmental, social and governance (ESG) issues are to be implemented.

  • Introduction of regulations on the pre-marketing of investment funds

Pre-marketing, i.e. the provision of information on investment strategies and concepts to potential professional and semi-professional investors, is to be regulated as uniformly as possible across the EU in future. This means that pre-marketing, which has so far been largely unregulated, will also become a regulated activity. The legislator is following the requirements of EU Directive 2019/1160, according to which "pre-marketing" is the direct or indirect provision of information on investment strategies or investment concepts to potential investors resident in the EU in order to test their interest in a fund that is not yet registered or is registered but has not yet been notified for distribution and no subscription opportunity exists (Art. 2 No. 1). In practice, this will mean that in future every discussion between the representative of the KVG and a potential investor about the investment strategy of a future fund will probably constitute "pre-marketing" according to this definition - with all the subsequent consequences of the new notification and documentation obligations. In future, it will be particularly important for AIF-KVGs to comply with this stricter obligation or to obtain appropriate advice at an early stage in order to meet the requirements of the new law that is about to come into force.

Yours TAXGATE team will follow the further development of the draft law and will be happy to provide you with further information at any time.